Taxation Vexation: Special districts often lead to wildly disparate tax bills among neighbors

The Arizona Republic
Friday, May 10, 2013
Michelle Ye Hee Lee

Arizona’s patchwork of special taxing districts took shape more than three decades ago as local governments looked for ways around property-tax limits without incurring voter wrath.

Today, that system is convoluted, inconsistently regulated and often mystifies taxpayers. Its effects can make or break homeowners, whose property-tax bills often include a one-two punch of levies for local government services and special-district items ranging from street lights to irrigation.

Local governments are allowed by state law to create these districts, but they generally operate outside public consciousness. Nearly nine out of 10 Maricopa County homeowners pay taxes to at least one of the nearly 1,450 active special districts in the county.

The special-district setup, which is not uncommon nationwide, obscures the lines of accountability, making it hard for homeowners to know exactly who imposed the taxes, to whom they are paid, how much goes toward what, or how to challenge them.

No single local or state government agency is charged with scrutinizing or auditing the flow of taxpayer money into these districts.

Equally confounding is the way special-district taxes affect each homeowner differently. Because of district boundaries, one resident unknowingly may pay hundreds of dollars more or less than a neighbor down the block, even as both pay taxes toward the same school district, municipality and county.

The effect is additional taxpayer frustration over Maricopa County’s property-tax system, which has vexed homeowners over the past five years as tax bills for most people failed to drop at the same pace as their home values.

From 2008 to 2012, overall property taxes declined 16 percent on average while property values plummeted 49 percent, according to an Arizona Republic analysis of county tax and property records.

Maricopa County has nearly 1,450 active special taxing districts, not including 56 school districts. The school-district taxes make up the largest portion of a homeowner’s property-tax bill. Taxes for schools, cities and counties are calculated based on the limited cash value of properties. Special districts levy secondary property taxes, which are calculated based on the full cash value of properties.

Individual Maricopa County homeowners who owed special-district taxes paid between 56 cents and $10,426 to these districts in 2012, an Arizona Republic analysis found. More than 146,000 homeowners paid no special-district taxes at all, while nearly 800 others paid taxes to six different special districts. In extreme cases, special taxing districts can compose up to half of a homeowner’s bill — and not all districts have a limit on the amount they can charge taxpayers.

In 2012, Maricopa County’s special taxing districts took in nearly $71 million in property taxes, though they generally are a small part of an average tax bill.

Each district’s taxing model varies, as well. Some districts tax based on property values, others based on a property owner’s use of services that the districts are designed to provide. The districts are created by various methods, few of which are obvious to taxpayers. And they are inconsistently regulated.

“Special districts are, by definition, a government,” said Stephen Slivinski, a Goldwater Institute senior economist who has been studying the districts and is preparing a policy report about them.

“Not all of them are required to have the same amount of accountability or transparency as the more traditional forms of government are,” he said. “Yet they have a lot of the same functions as those governments — they’re providing services. They’re taxing. They’re spending. They’re issuing debt.”

These districts essentially act as financing mechanisms for residents to tax themselves for a range of services, including irrigation-water delivery, street lighting, road and community-park maintenance, fire protection, power and pest control. The majority of districts are created by residents within specific geographic areas.
Special district tax
comparisons
Charges vary
Special-district boundaries are drawn on a case-by-case basis. Neighbors on the same block could have varying bills because they may live in slightly different districts.

The Republic’s analysis showed that neighbors within a square mile who have comparable home values and are taxed by the same school, municipal and county jurisdictions can have hundreds of dollars in discrepancies in their tax bills because of special-district charges.

Gilbert homeowner Michael Odermatt, for example, paid $587.98 in property taxes last year to an improvement district. A mile away, another Gilbert resident whose home has the same assessed value — but who did not live in the same improvement district as Odermatt — paid $39.84 in special-district taxes.

Odermatt had no idea his neighbors were not paying the same taxes. He was not aware special districts were levying taxes on his home. He has noticed that plants, landscaping and parks in his subdivision are well-maintained. But he said he would rather not pay special-district taxes.

“I pay enough taxes to ... Gilbert that they should maintain their own city,” Odermatt said. “It’s public property, (the public’s) property taxes, and you should maintain those properties for everybody to enjoy. ... There shouldn’t be another line item. Just because you can segregate it as another line item doesn’t mean that you should.”

Arizona has one of the highest rates of overlap among special districts, Slivinski said.

These districts began to crop up across the country in the 1970s, and their growth coincided with another trend: states and localities enacting tax and expenditure limits on local governments. Most of these new districts were not covered by those limits.

“Once counties and cities began to realize that they can spend more money in their general fund if they just offloaded certain functions from their original budgets to these special districts, (which) were generally less accounted for, less transparent,” Slivinski said, “(local governments found) they can just free up some space in the budget that were under these caps.”

For example, a city may allow a new development to finance infrastructure like roads or street lighting by issuing bonds that are paid off by special-district taxes. The taxes do not count against the city’s tax limit, and the cost does not come out of the developer’s pocket.

It takes decades for the districts to dissolve, if ever. That means most Arizona homeowners will be paying some portion of their tax bill to special districts for as long as 25 to 30 years, when bonds to finance infrastructure are paid off in full.

All it typically takes to form a special district is agreement from 50 percent plus one of residents within district boundaries.

The exception is a community-facilities district, a specific mechanism allowing a real-estate developer to build infrastructure like roads or public parks for future residents of a development. Developers work with municipal governments to set up a system in which future landowners within these districts pay incremental property taxes that offset the cost of building things like roadways or storm drains in their community.

Because there are no residents in community-facilities districts when they are formed, only the agreement between the developer and a municipal government is needed to form the district. Residents who move into the district must agree to be taxed when they move in.

Bill Kirschner, a Marley Park homeowner in Surprise, paid $607.50 in taxes to the Marley Park Community Facilities District last year, plus $97 in taxes to two other special districts. A mile away, another Surprise homeowner, whose property is not in Marley Park, paid $69.32 in special-district taxes.

Kirschner said his special-district taxes in Marley Park are significant. But he anticipated that when he bought a home there, and the infrastructure his taxes finance directly benefits the neighborhood and his family.

“If it was a problem for me, I could have moved someplace else,” said Kirschner, a commercial banker. “What we loved about Marley Park was the sense of community. The community association takes an active role.”

Karrin Taylor, executive vice president of Scottsdale-based DMB Associates, which runs Marley Park, said DMB is “very meticulous” about notifying residents of all costs associated with living in their communities. Taylor said residents can express their approval or rejection of district taxes by deciding whether to live in the community and pay the taxes, she said.

“We do additional layers of disclosure just because a better informed buyer is a better, long-term resident,” Taylor said.
Inconsistent regulation
There are various ways to create special districts, and the same goes for overseeing them — which results in vastly decentralized regulation.

A lengthy Arizona statute governs how special districts are formed and authorized to levy taxes. Several municipal, county and state agencies are statutorily involved in aspects of the formation, taxation and regulation of these districts.

In practice, it is a roundabout process to track exactly how each district formed and who maintains paperwork to monitor the flow of tax revenues in and out. There is no master regulatory agency, although several county agencies are responsible for compiling the amounts levied by special districts each year.

The districts are governed by boards of directors made up of district residents. Directors are elected to the boards based on statutory guidelines.

Officials from various county, municipal and state governments point to district boards as separately elected bodies that control their own finances and governance. It is unclear how much involvement directors have in running districts. It is also unclear how many residents know the boards exist or who serves on them.

Community-facilities districts are linked to the city or town in which the properties are located. Their governing bodies tend to be the city or town councils of the jurisdictions in which they operate. Their meeting materials are posted through the municipal public-notice process.

But not all special taxing districts have public-meeting notices, meeting minutes or agendas required of their governing bodies.

Community-facilities districts are more closely monitored than most special districts. That may be because state statutes give a lot of authority to them, said Kevin McCarthy, president of the Arizona Tax Research Association.

“They can do a lot. They can do everything short of declaring war on Mexico,” McCarthy said.

Each special taxing district is required to file paperwork through one of a variety of government entities, but there is no one clearinghouse. For example, 1,299 street-lighting improvement districts levied taxes in 2012. Of them, 267 are county districts and 1,032 are municipal districts. Each district’s documentation is maintained by its respective municipal government.

Once districts are formed, their levies are tracked by the county finance department, which publishes a levy book every year. The County Treasurer’s Office acts as a banker for special districts, opening accounts for them and entering their collections and distributions, Treasurer Charles “Hos” Hoskins said.

For municipal street-lighting districts, for example, the County Treasurer’s Office collects taxes, deposits them in the municipal government’s account and the municipal government oversees the spending of the taxes, he said.

Documents that were recorded through city or county clerks’ offices showed annual financial reports submitted by the boards. But no Arizona government entity has statutory responsibility to audit all special taxing districts, not even the Arizona Auditor General’s Office.

“The only commonality across special districts is, there is nothing in common,” McCarthy said. “They’re each different. They’re each crafted and put into state statute in order to provide some service that is not provided by county government or city government.”

The level of oversight for special districts varies. Arizona statutes set different requirements for the frequency and type of financial reports that districts must file based on their annual budgets. Some larger districts must submit financial reports conducted by independent certified public accountants. Smaller districts can send handwritten reports of the year’s revenues and expenditures, with no supporting documents.

Most special districts are required to send copies of their financial reports to more than one office. Generally, districts must send a copy of their completed audit or financial review to the county Board of Supervisors or the county treasurer. Some send copies to the Auditor General’s Office or to their municipal governments.

However, by most accounts of officials who receive financial audits, their responsibility is not to check the validity of the reports or to enforce the law. They simply keep track of their submission.
Who governs?
Methods of governing special districts vary widely, putting the onus on taxpayers to figure out who is setting and collecting special district taxes.

That isn’t always easy.

Some districts are overseen by local elective governing bodies such as a City Council. Others are independently run by boards of directors composed of residents elected by more than half of their neighbors within district boundaries.

But district directors do not all operate under the same public expectations as the average local elected governing body.

While it is incumbent on property owners to find who their elected district leaders are, it is not immediately clear to taxpayers which districts they are paying, let alone who runs them.

Take the case of Steve Coker, a Phoenix homeowner who pays his taxes through an escrow account that manages his mortgage. Coker paid $201.20 in 2012 to Sun View Estates Irrigation Water Delivery District No. 55.

“It’s easier for people to not pay as close attention if their taxes are being paid through an escrow account,” Coker said. “I don’t think it’s as noticeable.”

Coker’s Phoenix home is his primary residence. He moved there in early 2011. The Sun View Estates district meets regularly, and he knows to contact it if he has any questions about his taxes. He lives in a tight-knit neighborhood where neighbors share concerns, but he has not heard concerns about irrigation-district charges.

State law allows residents or the county Board of Supervisors to sue to block district levies. However, the board clerk could not recall any lawsuit filed by the board against special districts in her two decades there.

The County Attorney’s Office is not involved in the districts’ legal proceedings, either. A spokesman for the office said that special districts are required to hire their own counsel and representation for legal matters and that the county attorney’s role generally is to help set up the districts.

“A cynic might say it was kind of designed that way purposefully,” said Slivinski, of the Goldwater Institute. “At the very least, even if you’re trying to be transparent, there’s only so much you can do to get people cognizant about this. You have so many layers of government. There aren’t enough hours in a day, often, to make sure you’re monitoring all of these.”

The vast majority of special-district elections are conducted by the districts, not through the county Elections Department. Fire districts, the Central Arizona Water Conservation District, the Maricopa County Special Health Care District and the Fountain Hills Sanitary District hold elections through the county. Other special districts maintain their own list of electors and mostly use paper ballots, county Elections Director Karen Osborne said.

In some counties, special districts hold elections with the help of their assessor or the cities. But that is not the case in Maricopa County, said Kristi Passarelli, county Elections Department campaign finance and jurisdictional manager.

The contact phone number for each district is available on every homeowner’s bill. But some of the districts’ phone numbers are connected to individual households, and it can be difficult to track people down. Information on special districts is not readily available to the public, as other governmental taxing districts’ information may be.

“From a policy standpoint, if you want people to be paying attention to what their government is doing, you’ve frustrated that end by breaking the link between the homeowner/voter and government that’s taxing their property,” McCarthy said.

Dennis Hoffman, economics professor at Arizona State University’s W.P. Carey School of Business, said it is the obligation of both the government and homeowners to strive for a transparent special-district system. Lawmakers and special-district leaders need to be clear in showing each homeowner how much he is being taxed, which services he is receiving, and how much he is paying in relation to others receiving similar services, Hoffman said.

In turn, voters need to speak up about special-district taxes if they want to dispute or support them. The system relies on the involvement of citizens to hold special districts accountable, he said.

“If you put more effort into showing people what they’re getting for what they’re paying,” Hoffman said, “going forward, you’re going to move to a level of government that is more palatable.”